Argentina was the star of Latin America in the early and mid-1990s. Yet by late 2001, Argentina had been in recession for nearly four years, mainly because of Brazil’s devaluation of its own currency in 1999—making Brazil’s exports cheaper on world markets. Meanwhile, Argentina’s goods remained relatively expensive because its own currency was linked to a very strong U.S. dollar through a currency board. As a result, Argentina saw much of its export business dry up and the economy slowed significantly. By late 2001, the IMF had already promised $48 billion to rescue Argentina.
Things came to a head when the country began running out of money to service its debt obligations. The country finally defaulted on its $155 billion of public debt in early 2002, the largest default ever by any country. The government scrapped its currency board that linked the peso to the U.S. dollar, and the peso quickly lost around 70 percent of its value on currency markets. The government, strapped for cash, seized the savings accounts of its citizens and restricted how much they could withdraw at a time.
Argentina has in many respects recovered from its 2001–2002 collapse. It has registered growth of around 9 percent a year and unemployment fell from a high of 25 percent in 2002 to around 8 percent in 2008. The government’s plan—stimulating demand by raising wages, imposing price controls, keeping the peso low, and boosting public spending—seemed to be working. Argentina was expected to continue growing at a slower pace of around 4 to 5 percent, but inflation was running at 9 percent a year and cutting into purchasing power. As of mid-2008 Argentina’s credit rating was downgraded, although another economic collapse was unlikely.8